Tax Cuts Will Have ‘Limited Impact’ on Economy, Moody’s Says

The new tax law will have a limited impact on the U.S. economy, analysts at Moody’s Investors Service reiterated in a new analysis published Wednesday, which also warned about the legislation’s effect on the federal debt, state and local governments and home prices.

The Moody’s analysis highlighted three reasons the tax bill won’t supercharge the economy:

“First, with the US economy close to full employment, the extent to which any fiscal stimulus can substantially increase growth is limited.

"Second, we do not expect corporate tax cuts to lead to a meaningful boost in business investment, which has remained tepid despite a supportive economic environment characterized by low interest rates, low inflation and strong corporate earnings. We believe it is likely that US nonfinancial corporates will prioritize activities such as share buybacks, M&A and paying down existing debt over investment beyond that already planned.

"Third, while we see household consumption as the primary channel through which the tax cuts will impact growth, this will be muted. More than three quarters of the $1.1 trillion of individual tax cuts over 10 years is expected to go to those making more than $200,000 a year in taxable income. This group represents 5% of all taxpayers. These individuals are likely to spend a relatively small portion of their tax savings on current consumption, limiting the impact on the economy.”

The Moody’s analysts also said that the larger deficits resulting from the tax bill — combined with the Federal Reserve’s efforts to normalize monetary policy by raising interest rates and unwinding its balance sheet — “will increase the effective cost of debt for the government faster than we previously expected.”